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How Important is the US Non-Farm Payroll Report to the Forex Market?

Nearly two-thirds of the US GDP is driven by consumer spending, which makes job data so important for financial market participants. The United States Non-Farm Payroll (NFP) report, released by the Bureau of Labor Statistics (BLS), is one of the most critical and anticipated economic indicators by currency traders. It is released on the first Friday of each month at 8:30am EST, covering the data of the previous month. The report contains information regarding the total number of paid workers across all US businesses, excluding employees in government offices, private household businesses, non-profit organizations and agriculture.

As a result, this report provides critical insights into the nation’s inflation, consumer demand and economic growth. The United States is the world’s largest economy, with the US Dollar being the world’s reserve currency. Not only do other countries peg their currencies to the value of US Dollar, but important commodities, like oil and gold, are priced in terms of this currency.

This makes the Non-Farm Payroll report a very important release to keep track of. It not only moves the forex market, but also equities, treasuries and commodities. The forex markets tend to become quite volatile immediately after this release.

Impact of the NFP Report on the US Dollar

The report basically gives an estimate of the number of jobs added to the economy and the amount of spending power consumers have. As stated above, an increase in consumer spending has always been a factor that boosts the US Dollar, although the impact is often understated. The report is released monthly, which makes it a good indicator of US economic health. A rise in job creation is considered favourable by the Federal Reserve, the Central Bank of the United States. If unemployment levels are higher than usual, the Fed tends to lower interest rates, in order to increase economic output and employment levels.

This kind of stimulatory monetary policy, which includes low interest rates, brings down the demand for the US Dollar, weakening its value in relation to other currencies, such as the Euro and the Japanese Yen. Hence, any weakness in the US labour market causes the US Dollar to depreciate against other major currencies.

On the other hand, strong job data leads to the Central Bank considering an increase in interest rates, which is positive for the US Dollar. This is subject to other aspects being in control. A very high rate of increase in the addition of jobs could also lead to a rise in inflation at some point. The role of the Fed is not only to drive employment and economic growth, but also to curb inflation.

Currency Pairs Most Impacted by the NFP Report

This American employment indicator impacts all currency pairs that involve the US Dollar. The major ones include the EUR/USD, AUD/USD, GBP/USD, USD/JPY and USD/CHF. Other currencies, like the CAD/JPY, may also witness a sharp increase in volatility, with the release of the NFP data, which means that trades could get stopped out. Spreads may widen, which could lead to margin calls.

How Do NFP Releases Cause Volatility?

The impact of the NFP data is measured by the difference between anticipated and actual figures reported by the US Bureau of Labor Statistics. In the forex market, this difference is taken very seriously. If the actual data is lower than what was expected, traders usually sell-off the US Dollar, in anticipation of a weaker economy. They tend to then move towards high-yielding currencies, in place of the US Dollar.

An expected change usually brings about a mixed response in the markets. Traders look into other economic data, in order to gain better insights. Usually, traders look towards the addition of at least 100,000 jobs to consider the economy as growing. Other reports that are studied along with the NFP include the retail sales data, CPI and manufacturing index. Here’s a look

1. ISM Manufacturing Survey

Although the report doesn’t provide definite numbers as such, it gives an idea of the direction of business performance. When the index is above 50, it indicates a rise in employment levels.

2. Jobless Claims

Claims are filed weekly for unemployment benefits, which are often compared to the NFP data. It doesn’t have much impact on the forex market per se, but is considered a good macroeconomic analysis tool by investors.

3. ADP Employment Report

Often released a few days before the NFP, this report gives an idea about the employment situation in the private sector. It could be considered a precursor to the actual NFP release.

4. Household Survey

This report is released on the same day as the NFP, providing the unemployment rate. This is calculated by the number of individuals actively looking for employment, in terms of a percentage of the entire labour force. This is calculated separately from the NFP report, based on unemployed and employed people in the previous month.

Countering a Rise in Forex Volatility

It may be a good idea to refrain from trading right after such reports are released. Volatility levels spike and then return to their original levels after a few days. Experts suggest following a pull-back strategy, rather than a break-out strategy to manage the rise in volatility. Here, traders wait for the currency pair to retrace before entering into a position.

The initial rise or decline in currency values, moments after the news release, gives an idea of the direction in which the pair is headed. Following this, traders wait for a trade set-up that is a sequence of events that need to unfold in order for the trader to make their trading decision. This usually takes 2 to 3 days, since a lot of volatility surrounds the news. Technical traders, after an initial move of 30 pips or more, would expect to see a pullback of five one-minute price bars. This means that if the prices initially went up, there has to be a decline, which should remain consistent for at least 5 bars. But, this price shouldn’t drop below the 8:30am price, from where it all started.

Final Word

Placing stop-losses at the right points is also important to protect against unexpected market swings. Having an economic calendar is helpful in keeping track of NFP and other important economic releases and, therefore, making informed trading decisions.